An exchange is a central marketplace with established rules and regulations where buyers and sellers, referred to as traders, meet to trade. Some exchanges, referred to as open outcry exchanges, operate using a trading floor where buyers and sellers physically meet on the floor to trade. Other exchanges, referred to as electronic exchanges, operate by an electronic or telecommunications network. An electronic exchange typically provides computerized matching between traders. Some example electronic exchanges include European Exchange (“Eurex”), London International Financial Futures and Options Exchange (“LIFFE”), Chicago Mercantile Exchange (“CME”), and Chicago Board of Trade (“CBOT”).
With respect to electronic exchanges, traders connect to an electronic trading platform by way of a communication link through their user terminals. Once connected, traders typically choose which tradeable objects they wish to trade. As used herein, the term “tradeable object” refers to anything that can be traded with a quantity and/or price. It includes, but is not limited to, all types of traded events, goods and/or financial products, which can include, for example, stocks, options, bonds, futures, currency, and warrants, as well as funds, derivatives and collections of the foregoing, and all types of commodities, such as grains, energy, and metals. The tradeable object may be “real,” such as products that are listed by an exchange for trading, or “synthetic,” such as a combination of real products that is created by the user. A tradeable object could actually be a combination of other tradeable objects, such as a class of tradeable objects.
User terminals (also referred to as client devices) are connected to the electronic trading platform by way of a communication link to facilitate electronic messaging between the trading entities and the exchange. The messaging includes market information that is distributed from the electronic exchange to traders, as well as orders, quotes, acknowledgements, fills, cancels, deletes, cancel and replace, and other well-known financial transaction messages. Although the amount or type of market information published by the exchange often differs, there are some standard pieces of information. Market information may include data that represents just the inside market which refers to the lowest sell price (best ask) and the highest buy price (best bid) at a particular point in time. Market information may also include market depth, which refers to quantities available at the inside market and can also refer to quantities available at other prices away from the inside market.
Once the client device receives the market information, it may be displayed on the trading screen. Upon viewing the market information, traders can take certain actions including the actions of sending buy or sell orders to the electronic exchange, adjusting existing orders, deleting orders, or otherwise managing orders. There are a variety of different order types that a trader can enter in the electronic market. Traders may also use software tools to chart and graphically display the received market information or information calculated using the market information.
Over the years, a number of these software tools, in the form of analysis systems and graphical charting displays, have been created to assist traders in analyzing and attempting to predict market behavior. By providing such information, traders are generally able to assimilate enormous amounts of data and make more informed decisions. The use of such tools has also enhanced the level of intuition a trader may gain when trading in an electronic trading environment.
A conventional method of assimilating market information received from an exchange is, for example, to chart the information in a graphical display. Many different methods of charting market information are used by traders, such as historical or real time market data charts, pie charts, bar charts, or traditional candlestick charts. Similarly, many different types of market information can be charted, for example, volume, price vs. time, or last traded quantity. Traders often use the charted market information to assist them in identifying market patterns and market trends.
A common method of analyzing the volume and market activity is by watching time and sales prints as trades are posted. This method of volume analysis has traditionally been known as “tape reading.” Practitioners watch the trades occurring in real time, looking for clues as to which side of the market (buy or sell) large trades are occurring on, observing the relative speed of the trades, the responsiveness of the other side as a large (or small) trade occurs, etc. The information flow is internalized by the trader over time, and the knowledge helps the trader decide how and when to respond.
However, this decision making approach is extremely subjective, and requires many hours of observation to understand and effectively apply the approach. Also, if a trader leaves his screen and does not view market activity for some time, their relative baseline framework will be lost, and upon their return it will take the trader more time to get back up to speed.
Another traditional method of analyzing volume information, which may be considered an improvement by some to the “tape reading” method, is to create a running total volume of the difference between the buying volume and the selling volume commonly referred to as On Balance Volume (“OBV”). The OBV method adds or subtracts each traded volume to or from the running total volume based on relative price movement between the current trade and the last trade. For example, if the current traded price is higher than the last traded price, then the volume associated with the current trade is added to the running total volume. If the current traded price is lower than the last traded price, then the volume associated with the current trade is subtracted from the running total volume. The OBV running total volume is then charted or graphically displayed on a trading chart alongside market prices, which can be similar or different than the charted market prices.
While the previously described methods used for analyzing volume have provided traders with valuable information, it is desirable to offer an improved method for volume analysis that provides more accurate information regarding the trading activity of the tradeable object.